In his day one keynote speech to the EVCA International Investors Conference in Geneva on Wednesday, David Swensen, CIO at the Yale Endowment expressed concern that mega funds with $2bn-plus commitments were not producing sufficient returns to make them an attractive proposition to investors.
Swensen questioned the potential of such funds to deliver compelling returns in part because of the management fees they attracted. Swensen's argument was that mega fund GPs shy away from making bold investment decisions in order to protect these fees. He also pointed out that the size of these funds prompted them to make larger investments in later stage companies, resulting in lower returns for investments.
The debate regarding the validity of mega funds continued into the second day. Hardy McLain, managing partner at CVC Capital Partners, countered Swensen, pointing out that the vilification of large funds was merely part of the same process that saw small funds wrongly criticised in the late 1990s.
Speaking as part of the “Best of times, worst of times” panel discussion, McLain said: “three or four years ago, the prevailing notion was one of large funds being good and small funds bad. This wasn’t strictly the case then and the reverse is not the case now. Between 1998 and 2001, we invested E3.4bn across 40 companies. We expect these investments to achieve top quartile returns. In many ways, the current market offers better prospects than those enjoyed between 1998 and 2001.”
In June 2001, CVC Capital Partners raised E4.65bn for what is still Europe's largest buyout fund.